Turn Off the Oil Subsidy Spigot

SOURCE: AP/Pat Sullivan

An oil pump sits idle along the Texas Gulf Coast. The oil subsidies Sen. Bernie Sanders (I-VT), the president’s budget, and other lawmakers propose eliminating pay companies to find and produce oil. Eliminating them will have little if any effect on consumer prices.

By Sima J. Gandhi | July 6, 2010

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Three weeks ago, the Senate rejected a proposal to eliminate about $35 billion in tax subsidies to oil companies as millions of gallons of oil spewed into the Gulf of Mexico. Sen. Bernie Sanders (I-VT) proposed using these funds to reduce the deficit and fund state energy efficiency programs. The Sanders plan to close these loopholes lost by a vote of 35-61, with every Republican voting against it.

The vote to preserve outdated subsidies that make rich oil companies richer while creating little benefit to the taxpayers who foot the bill was a victory for the oil industry and its lobbyists. They hailed the “vote to preserve a domestic manufacturing industry that is critical to our nation’s energy security and to the nascent economic recovery,” in the words of Charles T. Drevna, president of the National Petrochemical and Refiners Association.

Lawmakers must end tax subsidies to the oil industry. But the Senate’s action makes clear that doing so will require Congress to overcome lobbyist arguments that killing subsidies will harm the economy. Profitable and powerful oil companies, such as BP and ExxonMobil, pay lobbyists millions of dollars to scare lawmakers into believing that ending subsidies to oil companies will wreak havoc on the American economy. These arguments are advanced by trade organizations such as the American Petroleum Institute, and they suggest that eliminating subsidies “could mean less U.S. energy production, fewer American jobs,” and higher oil prices.

The evidence suggests otherwise:

Tax subsidies for oil companies don’t decrease our reliance on foreign oil. Oil companies often argue that without subsidies, domestic production will decline and our reliance on foreign oil will increase. Yet U.S. production has steadily declined since its 1970s peak. We produce about the same amount of oil now that we produced in the 1950s despite billions in subsidies over the past 30 years, as seen in this graph.Subsidies do little to change the fact that limited domestic supplies contribute to the United States importing about 60 percent of its oil. In fact, the Treasury Department estimates that ending subsidies will affect domestic production by less than one half of 1 percent. If we’re serious about ending oil imports we need to transition away from oil as a fuel supply.

President George W. Bushhimself noted in 2005 that the profit potential in the oil industry drives company behaviors and not the subsidies. “With $55 oil we don’t need incentives to the oil and gas companies to explore. There are plenty of incentives.”

Oil subsidies don’t save jobs. Oil companies and lobbyists also argue that ending subsidies will kill jobs. But this doesn’t make sense since eliminating oil subsidies minimally impacts domestic production (as explained above).It’s also important to note that the oil and gas industry is about 10 times more capital intensive than the U.S. economy as a whole. Consequently, subsidizing oil industry production to create jobs isn’t a good use of taxpayer dollars. Any decrease in production will likely affect capital investment in machinery, not the number of jobs created.

Oil subsidies don’t help consumers at the pump. Finally, oil companies are fond of saying that ending tax subsidies will cause disastrous price hikes. But the tax subsidies Sanders, the president’s budget, and other lawmakers propose for elimination pay companies to find and produce oil. Eliminating them will have little, if any, effect on consumer prices.A Joint Economic Committee report states, “the removal or modification of [one of these subsidies] is unlikely to have any effect on consumer prices for oil and gas.” The committee found that subsidies do not affect production decisions in the near term. And in the long term the Energy Information Administration explains that the major factors affecting oil prices include the production limits set by the Organization of the Petroleum Exporting Countries and global disruptions in supply. Moreover, the minimal impact of tax subsidies on domestic production (as discussed above) underscores that eliminating tax subsidies will have little, if any, effect on oil prices.

Thankfully, the Sanders amendment that the Senate voted down two weeks ago is not Congress’s last chance to act. Sens. Robert Menendez (D-NJ), Jeff Merkley (D-OR), and Bill Nelson (D-FL) introduced The Close Big Oil Tax Loopholes Act, S. 3405, which would eliminate nearly $20 billion worth of big oil tax subsidies while preserving subsidies for companies with less than $100 million in revenue. And Rep. Earl Blumenauer (D-OR) last week introduced the End Big Oil Tax Subsidies Act, H.R.5644, which would close big oil tax loopholes worth $30 billion over five years.

Senate Majority Leader Harry Reid (D-NV) indicated that the Senate will debate clean energy, oil disaster, and pollution legislation in July. This is a golden opportunity to eliminate subsidies to oil companies, which are some of the most egregious tax expenditures (shadow spending programs run through the tax system) that in total amount to over $1 trillion in spending this year alone. Lobbyists and oil companies will undoubtedly continue fighting for the status quo with false arguments. Congress must fight back with hard evidence. Political courage is priceless with American taxpayers footing the billion-dollar bills.

Sima J. Gandhi is a Senior Policy Analyst at the Center for American Progress.